KEPPEL DC REIT (SGX:AJBU)
FRASERS CENTREPOINT TRUST (SGX:J69U)
ASCOTT RESIDENCE TRUST (SGX:A68U)
Singapore REITs - A Shelter For The Doves & Uncertainties
Healthy 4QCY18 results
- The 24 S-REITs under our coverage largely turned in a healthy performance for the recently concluded 4QCY18 results season, delivering average DPU growth of 2.1% on a y-o-y basis. 21 of these met our expectations, 2 exceeded (ASCOTT RESIDENCE TRUST (SGX:A68U) and SOILBUILD BUSINESS SPACE REIT (SGX:SV3U) but the latter was due to a one-off item) while only 1 missed (STARHILL GLOBAL REIT (SGX:P40U)).
- Another positive stems from the fact that out of these 24 S-REITs, there were only five which recorded negative DPU growth on a y-o-y basis. In terms of sub-sector breakdown, all segments saw positive DPU growth, with the exception of healthcare (our only covered Health Care REITs is FIRST REAL ESTATE INV TRUST (SGX:AW9U), which registered flat DPU).
Look forward to further DPU growth
- Looking ahead, we are projecting FY19F DPU growth to come in at 1.9% (market-cap weighted) for the S-REITs under our coverage. This is expected to continue in FY20F, with projected DPU growth of 2.4%.
- For FY19, this would be driven largely by KEPPEL DC REIT (SGX:AJBU) and Office REITs, while for FY20, the main contributors to growth would come from Industrial REITs, Hospitality REITs and KEPPEL DC REIT once again.
Sector preference: Retail > Hospitality > Industrial > Office
- In terms of sub-sector preference, we continue to rank Retail REITs as our most preferred, but move up Hospitality REITs to second place ahead of Industrial REITs.
- Although Office REITs will continue to benefit from market rental growth momentum, we believe this has been priced in by the market, with forward distribution yields at relatively tight levels. We thus see downside risks on Office REITs and we believe there is more room for disappointment than an outperformance following a higher base effect after core Grade A CBD rents grew 14.9% in 2018.
- On the other hand, most Hospitality REITs painted a more sanguine outlook ahead, while recent hotel transactions and the Government Land Sales hotel site at Club Street lead us to believe that the asset valuation of Hospitality REITs are conservative.
- See sector reports:
Global macroeconomic environment facing headwinds
- A number of international agencies such as the OECD and IMF have been on a downgrading spree in the first three months of the year, slashing growth forecasts for 2019 and 2020 across the board. The weakening of both soft and hard data lends credence to their gloomy outlook.
- OECD cut its global real GDP forecast for 2019 and 2020 by 0.2 ppt and 0.1 ppt to 3.3% and 3.4%, respectively. A more significant downward revision was slapped on the Euro area, with a 0.8 ppt and 0.4 ppt cut to 1.0% and 1.2% for 2019 and 2020, respectively. IMF also lowered its global economic forecast by the same magnitude as OECD, to 3.5% in 2019 and 3.6%% in 2020. Meanwhile, Mario Draghi, the president of the European Central Bank (ECB), highlighted that growth in the Euro area is expected to come in at 1.1% this year, versus a previous forecast of 1.7%.
- In recent times, increasingly more S-REITs have ventured into Euro zone and the UK to expand their geographical footprint. While the expected slowdown in economic growth in the Euro zone and uncertainties surround Brexit would likely pose some risks, we note that the underlying leases of the properties acquired by S-REITs are typically long-term in nature, thus providing some visibility.
- The fact that interest rates in the Euro zone would remain at current levels “at least through the end of 2019” would also facilitate a more favourable funding environment in EUR terms and thus provide opportunities for further inorganic growth in this region, in our view. We also see S-REITs as a useful tool for investors to ride-out the macroeconomic slowdown given their defensive attributes.
Fed funds futures rates point to a benign interest rate environment
- Drawing reference from recent developments in the U.S., we note that the U.S. nonfarm payrolls released last week showed that Feb added only 20k jobs. This is significantly lower than consensus’ expectations for a 180k gain, and marked the weakest month of jobs creation since Sep 2017. Federal Reserve Chairman Jerome Powell’s recent speeches also painted a dovish tone, highlighting that the Committee has adopted a patient, wait-and-see-approach in light of muted inflation pressures.
- Looking at the Fed funds futures rate, we note that there is currently a 0% probability of a rate hike in 2019, while the probability of at least one rate cut is 17.0% by the end of the year. This also implies that the base case is for the Fed funds rate to stay unchanged this year.
S-REIT managers have continued to exhibit financial prudence in their capital management
- Despite more benign rate hike expectations in 2019, we note that the 3-month and 6-month swap offer rates (SOR) have continued their uptrend since late October last year, by approximately 33 and 17 bps to 1.94% and 1.99%, respectively. Hence, it comes as a welcome relief that REIT managers have continued to be prudent on their capital management.
- The average gearing ratio of the S-REITs under our coverage stood at 35.5%, as at 31 Dec 2018, with 77.2% of their borrowings hedged/fixed. Meanwhile, the average debt to maturity was 3.2 years, with an average debt cost of 2.9% and interest coverage ratio of 5.1x.
- Although interest rate swaps (IRS) have risen YTD, they are still down from their recent peak in Oct 2018. Hence, some of the S-REITs may have taken this opportunity to lock in more hedges ahead.
Valuations have tightened, but near-term trading performance may continue
- The forward yield spread between the FTSE ST REIT Index (5.81%) and the Singapore government 10-year bond yield (2.19%) last stood at 362 bps. This is approximately one standard deviation (s.d.) below the 5-year mean of 404 bps.
- While valuations leave nothing to be excited about at this level, in our view, we remain constructive on the near-term trading performance of S-REITs. This would be underpinned by continued benign of the rate hike trajectory by the Federal Reserve in 2019.
- We note that during times in 2018 when the market was risk-on, the yield spread of S-REITs had compressed to 2 s.d. below the historical average. Based on the fed funds futures rate, the market is pricing in no rates hikes by end 2019.
- In fact, the probability of a rate cut as implied by the fed funds futures rate is actually higher than the probability of a rate hike. Hence, should the Fed choose to raise rates at least once this year (given the still tight labour market), this may cause markets to relook at their assumptions and result in capital outflows from yield sensitive instruments such as REITs. Notwithstanding this risk, a rate hike, in any, would likely only happen in 2H19.
- Maintain NEUTRAL. Our longer term preferred picks are still KEPPEL DC REIT [BUY; FV: S$1.60] and FRASERS CENTREPOINT TRUST (SGX:J69U) [BUY; FV: S$2.50]. We add ASCOTT RESIDENCE TRUST [BUY; FV: S$1.25] as a replacement for FRASERS LOGISTICS & IND TRUST (SGX:BUOU) in to gain exposure to the hospitality sector and also in light of the latter’s strong share price performance.
- Based on Bloomberg consensus’ estimates for the entire S-REITs universe, the average potential capital upside stands at an average 6.8%. Including forecasted consensus’ average distribution yield of 6.6%, total projected returns for the sector works out to be 13.4% on average.
Wong Teck Ching Andy CFA
OCBC Investment Research
|
Deborah Ong
OCBC Investment
|
Joseph Ng
OCBC Investment
|
https://www.iocbc.com/
2019-03-12
SGX Stock
Analyst Report
1.600
SAME
1.600
2.500
SAME
2.500
1.250
SAME
1.250
